The application development outsourcing contract decision: The effect of service quality, relationship quality, satisfaction, and switching costs on continuation and discontinuation decisions

Although the popularity of IT outsourcing has grown over the last two decades, approximately one third of outsourcing contracts are discontinued. This discontinuation of contracts has resulted in renegotiations with the original outsourcing vendor, switching to another vendor, and backsourcing, or the return of previously outsourced functions in-house.; IT outsourcing is expected to grow to a {dollar}160 billion industry in the United States alone by 2005. Given the conclusion by some researchers that so many outsourcing arrangements end in vendor switches or backsourcing, it is apparent that a large amount of money is being needlessly wasted. By better understanding the factors that may lead to the discontinuation of outsourcing contracts, perhaps outsourcing vendors can increase the success rate of outsourcing agreements and companies can make better outsourcing decisions. Thus, the objective of this research is to determine what factors may be associated with the decision to switch vendors or backsource.; IT application development managers were surveyed and 160 responses are analyzed. This data set was subjected to logistic regression analysis to determine the factors associated with application development outsourcing discontinuations. Constructs utilized include service quality, satisfaction, relationship quality, and switching costs. These constructs were chosen as a result of a broad review of the IT and marketing literatures for factors associated with bringing services in-house or switching to another service provider.; Overall, poor communication, lack of timeliness, low user understanding, low reliability, high lost performance costs, high pre-switching costs, high sunk costs, and high management costs are significantly related to the decision to discontinue an application development outsourcing contract. These factors span across the four constructs proposed.; This research answers a call by Lacity and Willcocks (2001) to investigate backsourcing, as well as a similar outsourcing outcome, switching vendors. The results not only help fill a void in the academic IT outsourcing literature related to outsourcing contract discontinuations, but also provide practitioners with a valuable indication of the factors associated with outsourcing contract discontinuation.